The Euro drifted lower on Wednesday, with investors expecting the European Central Bank's vigilant stance on inflation to give way to concerns about economic growth following a decision on interest rates on Thursday. The ECB is expected to keep the benchmark euro zone interest rate at 4% (1% above the US rate), leaving the focus on whether the central bank's president, Jean-Claude Trichet, will stick to his hawkish stance amid signs of slowing growth in Europe.
Yesterday, EurUsd was trading down 0.15% at 1.4613, near the middle of a 1.4967-1.4311 range since mid-November. EurJpy was down 0.28% at 155.47 and EurChf slipped 0.32% to 1.6038. UsdJpy was down 0.13% at 106.39, weighed by a late-session decline in US stock indexes. GbpUsd was down 0.15% at 1.9616 after having drop down to 1.9554 low.
Futures markets already reflect expectations that the ECB will cut rates by a 50bp by the 3Q, but are split on chances of a further 25bp easing by year end.
The Bank of England will also be meeting on Thursday as well. Investors are expecting UK interest rates to be cut to 5.25% from 5.5%. Investors had earlier bought the Yen as Asian stocks posted their biggest loss in two weeks on worries about the health of the global economy, dampening investors' appetite for riskier assets. Worries about the global economic outlook were stoked on Tuesday by a sharp fall in the ISM's non-manufacturing Index, a gauge of the vast US service sector, which posted its biggest monthly decline on record. There were also signs that the slowdown will not be limited to the United States. Euro zone retail sales fell in December despite Christmas shopping, while growth in the bloc's service sector slowed almost to a standstill in January. Reports such as these have fed speculation that the Euro has yet to weaken the way that the Dollar did last year when the credit crisis began to imperil the US economy.